Tema-Ghana, April 19, CDA Consult – According to Dr. Richmond Akwasi Atuahene, a Banking Consultant, the introduction of the Domestic Debt Exchange plan has exacerbated Ghana’s economic troubles.
According to Dr. Atuahene, the banking sector, which owned approximately GHS 137.3 billion in government bonds and notes, was the hardest hit.
He mentioned this during a presentation on the theme “Analysis of Financial Trends and the Way Forward for Businesses” at the Tema Branch of the Ghana National Chamber of Commerce and Industry (GNCCI)’s bimonthly business meeting.
He stated that the restructuring of Ghana’s domestic debt, which resulted in the exchange of Ghs87.8 billion in bonds and notes paying an average coupon rate of 19.3 percent for new ones paying a coupon rate of nine percent and extending to 2038, had resulted in capital and liquidity losses for Ghana’s financial institutions.
“With only 64 percent voluntary participation (Ghs 87.8 billion), not underpinned by strong fiscal consolidation, it will not be necessary to reverse the adverse fiscal dynamics and reduce the debt overhang that has plagued Ghana for the past four years, and it will be difficult to achieve a debt-to-GDP ratio of 55 percent in 2028,” he said.
Citing a research paper (Frimpong and Atuahene, 2023), he stated that the domestic exchange could lead to a decline in liquidity in the financial system, explaining that banks that held the restructured short-term debt may have difficulty meeting their short-term funding requirements.
This, he noted, could lead to a liquidity squeeze in the banking system, limiting banks’ ability to service the demands of Small and Medium Enterprises (SMEs).
According to the banking consultant, the domestic debt swap could potentially have a detrimental influence on the Capital Adequacy Ratio (CAR) of banks and non-bank financial institutions.
“The conversion of short-term debt into long-term debt can increase the risk-weighted assets of banks, which can reduce their CAR; this can lead to a decline in bank financial stability and an increase in the risk of bank failure,” he noted.
Dr. Atuahene also stated that it could have a negative impact on bank profitability because the exchange could result in an increase in interest rates, as well as an increase in the cost of funds for the banks and an increase in the prices of credit facilities such as business overdrafts and short-term loans.
He emphasized that banks facing a liquidity squeeze may be less willing to extend credit to their business customers and individuals, which he noted could slow economic growth, and that a decline in profitability may also lead to a reduction in investment in the sector, slowing growth.
Mr. Michael Kabutey Caesar, Chairman of the GNCCI, Tema Branch, stated that the meeting was organized to offer the necessary data on current economic trends to act as a reference for member businesses to plan and sustain their investments.
